In a rare display, billionaire investor, Stan Druckenmiller, recently spoke at the University of Southern California (USC) alongside his friend Geoffrey Canada, founder of the Harlem Children's Zone (HCZ). Reported by Forbes as the 184th wealthiest American, Druckenmiller founded Duquesne Capital, a hedge fund that produced a remarkable 30 percent average annual return over a 30-year span and never had a losing year. In 2009, he was recognized as one of the country's most philanthropic individuals, pledging over $700 million in donations through his foundation.
Most recent media coverage of Druckenmiller has centered on generational equity, where he explains how the elderly are "stealing" money from younger generations. But at USC, he offered unique insight into his celebrated investment principles and discussed how he applied those principles to education by backing Canada's HCZ.
First, Druckenmiller identified the right market opportunity. With HCZ, there was dramatic inefficiency in the market. While educational debates often center on graduation rates and test scores, there are some places in the country where children's lives are threatened merely commuting to and from school. Before the Harlem Children's Zone, Harlem was one of those places -- the worst of the worst. According to Canada, less than half of Harlem students graduated from high school. A much higher percentage of children wound up incarcerated, not only ruining their lives but also wasting tax dollars spent harboring unproductive citizens. Canada estimated that the cost to imprison an individual is around $40,000 per year.
Next, Druckenmiller backed the right team. Upon meeting Canada, Druckenmiller said, "I knew I had to back this guy. I knew I had a winner." He was struck by Canada's intelligence and passion but also his unique position. Geoffrey Canada was a man, where the majority of work performed to help Harlem children was being done by women. So in a community where most fathers were absent, Druckenmiller partnered with the predominant male figure dedicating his life to help children better their lives through education.
Druckenmiller went onto say, "I've had some good investments in my life but this man is the best investment I've ever made."
Then, he properly structured his investment. In this case, Druckenmiller's potential losses were capped while his gains had no limit. Compared to the $40,000 spent annually per inmate, it costs only $5,000 per year to support each HCZ student. For a finite investment sum each year, HCZ children could become educated, productive members of society, instead of winding up in prison or suffering an even worse fate. According to Canada, more than 90 percent of HCZ children go on to attend college, and there are over 1,000 former Harlem Children's Zone students currently enrolled in college. In terms of extended social benefit, the return on investment may be well beyond measurement.
Lastly, Druckenmiller protected his investment. As part of gaining Druckenmiller's financial backing, Canada had to relieve his board of directors and allow Druckenmiller to become its new chairman. Druckenmiller was then able to assemble his own board, one which would help him execute properly. To many this move may seem excessive, but in the investment world, controlling interest is a highly coveted position. Considering that HZC's annual budget quickly swelled from under $2 million to over $100 million, it's understandable that Druckenmiller wanted to have adequate decision-making power.
As with his previous bets, Druckenmiller's invested capital is yielding substantial returns. Based on HCZ's success, Canada has assisted the Obama Administration in trying to replicate HCZ's success. With the government's assistance, there are now a slew of "promise neighborhoods" across the country, performing with varying levels of success. But Canada expressed that the key differentiator is having the capital and commitment from someone like Druckenmiller, not just government funds.
When asked what had attributed to his success, Druckenmiller quipped, "I have a gift for compounding money. I guess I also have an ego problem. I'm competitive. I like to win and want to beat somebody." In this instance, Druckenmiller's competition was an anemic education system attempting to serve some of the country's most disadvantaged youth. Hopefully, he keeps winning his bet.